Housing construction – mixed messages don’t help

Housing construction has become such a hot topic in Germany that it has broken out of the dedicated property sections of the country’s major daily newspapers and is now making front-page headlines and being discussed on the comfy sofas of mainstream current affairs programmes. Let’s take a look at some of the facts that everyone seems to agree on, and examine how many of the problems currently putting a brake on new housing construction are actually of the politicians‘ own making, and how expensive some of the solutions now being floated could prove to be

Housing construction: How many apartments does Germany actually need?

Depending on whose figures you take, Germany may currently be short of around 800,000 apartments, and that’s not even including the impact of around 1 million refugees who arrived in the country last year, or the uncertainty surrounding how many will be granted permanent residence, or how many new refugees will arrive this year and in the near future. The federal government openly admits that the country needs to be building 350,000 new apartments each year if this demand for housing is to be met. Some experts place the figure even higher, at 400,000 apartments per year. Irrespective of which figure is correct, the 270,000 apartments completed in 2014, while impressive, falls far short of what is actually needed.

Housing construction: What is driving demand?

The latest housing market reports indicate that vacancy rates for apartments in large cities like Berlin have fallen to record lows. Anyone looking for an apartment in Berlin right now is faced by a startlingly tight market in which only 1-2% of apartments are available to new tenants. Given the highly-contested market, it is highly likely that a large proportion of these vacant apartments are either in run-down buildings or less attractive, outlying neighbourhoods. It is not just in Berlin that housing is in short supply and demand is running high: alongside refugees fleeing conflict and persecution in North Africa and the Middle East, there are also increased numbers of young Europeans trying to get away from their under-performing home economies, and increasing numbers of Germans leaving their rural towns and villages behind to make a life for themselves in the big city. These factors, along with the perpetual growth in household numbers (both single-person and multi-person), are all combining to put the housing market under greater pressure than it has faced in decades.

Housing construction: What is the government planning?

So far, the federal government has announced a programme of €1 billion per year, from 2016-2019, to help fund new social housing. Before the ink on this proposal has even had a chance to dry, the SPD’s Barbara Hendricks, Federal Minister of Construction, has started campaigning to increase this to €2 billion per year, and for an extra year. At the moment this remains just a fresh and has not yet been approved by one of the men who holds the pursestrings, the Minister for Finance, Wolfgang Schäuble (CDU).

Housing construction: What else is the government planning?

Tax incentives to encourage private developers to build social housing and not just luxury apartments are to be introduced. Write-downs of 10% of construction/acquisition costs in the first two years following completion/acquisition, and 9% in the 3rd year are set to be introduced. The government’s initial plans limited these write-downs to apartments costing up to €2,000/m² and only until 2018, but new proposals would extend the write-downs to apartments costing up to €2,200/m², and for an extra four years, until 2022.

The problem: In Berlin there are only two districts, Marzahn-Hellersdorf and Spandau with prices still under €2,000. Also, making use of any write-downs depends on developers making profits! And developers of more expensive apartments would not be able to use the write-downs for the first €2,000 or €2,200/m² of their construction costs. If the m² price is higher, the write-down is completely lost.

This measure would reduce tax receipts by around €1 billion per year, totalling €4.3 billion through to 2024, which would have to be shared between the federal government, the 16 federal states and individual municipalities.

Housing construction: Expansion of social housing

Social housing is organised by the federal states, but supported by the federal government. Up to 30% of the population would currently qualify for social housing as a result of low household incomes, but there are only enough social housing apartments for 8% of the population. The remaining 22% of those who would qualify have to compete for housing on the open market. The government’s proposed funding of €4 billion over the next 4 years (or €10 billion over the next 5 years), would be designed to improve this situation. Many critics argue that it is not simply a question of throwing more money at the situation if the ancillary costs of housing construction are not addressed.

Housing construction: Property taxes are a strong disincentive

Grunderwerbsteuer – More than 50% of federal states‘ tax receipts come from Grunderwerbsteuer (2014: more than €9 billion). The tax rate was fixed at 3.5% across the whole of Germany until 2006, then the states were given the freedom to set their own rates. Instead of achieving competition to keep rates down, the result has been a race to the top, with most states introducing increases, and rates almost doubling. Only Bavaria and Sachsen have kept their rates at 3.5%. The higher property transfer taxes have a double negative effect – they dampen new construction and they put a brake on real estate transactions. In many cases, taxes are paid more than once for the same piece of land; the developer pays property transfer tax when they buy the building land and then investors/buyers pay property transfer tax when they purchase the development/house/condominium.

The German Economic Institute in Cologne (IW) has proposed an input tax deduction model, analogue to that used for VAT/sales tax, to allow developers to deduct taxes they have already paid from the amount of property transfer tax they are required to pay.

Housing construction: Building costs just keep on rising

New building and energy standards have led to a 7% jump in construction costs this year, to an average of €3,000/m². Ironically, most of the cost drivers are due to government regulations and taxes. This has led to an absurd situation in which the government is both driving costs higher (and thereby intensifying housing shortages) whilst at the same time trying to incentivise and pay for increased housing construction.

The President of the BFW Bundesverband Freier Immobilien- und Wohnungsunternehmen, Andreas Ibel, promptly issued the following targeted criticism: „Whoever decided to link tax write-downs to construction costs of just €2,200/m² clearly doesn’t want to encourage new housing construction, they are living in a fantasy world.”

Whether you are a developer or investor, tenant or property owner, these developments affect us all. Let us know what you think in the comments section below!

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